Price gap between grey hydrogen and low-carbon H2 will still be 'significant' in 2050, warns US government advisors
National Petroleum Council calls for game-changing hydrogen tax credit to be extended to 20 years
Official advisors to the US government have warned that under current policies, the price gap between polluting hydrogen and low-carbon equivalents in key sectors such as industry and transport is set to be “significant”, even in 2050.
Stay ahead on hydrogen with our free newsletter
The National Petroleum Council (NPC) — an official industry advisory body to the Department of Energy (DOE) populated by oil majors including Chevron, BP and ExxonMobil, as well as non-fossil-fuel organisations such as the Environmental Defense Fund — also recommends in a new report that Joe Biden’s pioneering 45V hydrogen production tax credit is extended by a decade to 20 years, so as to incentivise the necessary investment to make low-carbon hydrogen affordable.
The NPC tells Granholm that low-carbon hydrogen could ultimately achieve 8% of the US's emissions reductions, but that this would require scaling up the industry sevenfold by 2050. Current policies would achieve a scale-up of just twofold, it warned.
The effective deployment of low-carbon hydrogen in hard-to-abate sectors in certain areas of the US (for example, in refining and in exports on the Gulf Coast) had the potential to limit the overall national cost of reaching net zero by 2050 to 3% of GDP, it adds.
Failing to deploy low-carbon hydrogen where it is needed would add an additional 0.5-1% to that, the group says.
The US government should take action now to ensure the price gap is closed, by putting in place long-term incentives for both demand and supply, the NPC writes.
The extension of the 45V production tax credit to 20 years — just one measure proposed by the NPC in its vast report — would incentivise investment in low-carbon hydrogen production by aligning the subsidy more accurately with the 20-year investment lifecycle of infrastructure assets, the group says.
Details of the US hydrogen tax credit
The $433bn Inflation Reduction Act of 2022 creates a tax credit that would pay clean hydrogen producers up to $3 per kilogram (adjusted for inflation).
The size of the tax credits available to US clean hydrogen producers depends on the lifecycle greenhouse gas (GHG) emissions of each project, with a sliding scale depending on lifecycle emissions — measured in carbon dioxide-equivalent (CO2e) — of the H2 produced, including upstream methane emissions.
Hydrogen manufactured with less than 0.45kg of lifecycle CO2e emissions per kg of H2 would receive 100% of the credit, followed by 33.4% for 0.45-1.5kgCO2e/kgH2, 25% for 1.5-2.5kg and 20% for 2.5-4kg.
The lifecycle emissions would have to be verified “by an unrelated third party”, and only projects that start construction before 2033 would qualify.
“A long-term, effective, durable, and transparent price on carbon could phase in as shorter-term low-carbon energy funding and tax incentives are phased out to enable a smoother and more efficient market transition. Explicit carbon pricing in the form of a carbon tax or a GHG [greenhouse gas] cap-and-trade program provide the most economically efficient climate policy.”
The carbon price mechanism, which could take the form of an emissions tax or a cap-and-trade-scheme should be phased in with the goal of eventually replacing the need for 45V tax credits, the NPC said.
However, carbon prices of $100-200 per tonne tonne would be needed to create the required incentives to close the price gap between grey and low-carbon hydrogen, a level that could present an insurmountable political hurdle, the authors admit.
“Given that such a carbon price may be politically challenging in the US any time in the foreseeable future, other demand-driving policy options should be considered,” the NPA says.
The DOE should also consider introducing emissions intensity standards for industrial and transport sectors — although it also recommends funding incentive schemes for these sectors via the proceeds from a carbon pricing mechanism.
Specifically, Congress and the Biden administration should implement a national, technology-neutral low-carbon well-to-wake intensity standard applied to industrial users of hydrogen, the NPC said, which may require sub-targets for various different sectors such as steel production, chemicals or refining.
For the transport sector, the NPC recommends that a similar standard applies on a well-to-wheel basis across the entire transport sector. This would entail a low-carbon fuels standard programme to drive down the carbon intensity of different drivetrain pathways such as liquid fuels, electricity and hydrogen.
In addition, it recommends well-to-wheel emissions standards to improve the carbon intensity of individual vehicle models.
In addition, the NPC gave no guidance on how any incentive schemes should be funded without the aid of a federal carbon credits market.
The NPC's role as an official industrial advisor to the US government is laid out in statute. Privately funded by its members, it counts both oil majors and smaller regional oil & gas producers among its base, as well as academics, researchers and non-governmental organisations.
The NPC was at pains to characterise the report as balanced, pointing out that 67% of the report’s participants were from the non-oil & gas segments of its membership. However, most major workgroups in the report (behind the individual chapters of the document) were led by oil & gas majors including Chevron, BP and ExxonMobil.
(Copyright)